SUBHEAD: Unsustainable debt is the reason we are in this crisis, and it will not end until this debt is either paid off or defaulted
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By John Schettler on 16 August 2009 in The Writing Shop
http://www.writingshop.ws/html/collective_ignorance.html
I’ve been following the collective ignorance of both the mainstream media and the “analysts” and “economists” it relies upon in a number of blog posts the last few weeks. Today we learned that 90% of economists surveyed have said that the recession will definitively end in this third quarter. They point to the 6.7% GDP loss in the first quarter shrinking to a scant 1% loss, yet omit from their analysis that the bulk of the spending that drove the statistic was made by government bailouts and spending giveaways like “cash for clunkers.” Without that what would the real economy have logged—a staggering 8.9% decline in GDP last quarter!
image above: Green shoots, or is it supposed to be mustard seeds. The metaphor for economic recovery.
It was almost comical to note the progression of delusional thinking that first started with the germination of the “green shoots” metaphor into the public discourse. All the talking heads wanted to see signs of a recovery. There were no such signs that any thinking person could point to with any sense of intellectual integrity, and so the signs of a slowing decline were embraced instead as a sure indicator of imminent “recovery.” It’s a little like saying things are better because the 2nd tower took longer to fall on 9/11. Then, all the metrics that once measured bank solvency were conveniently changed or discarded. Shake and stir: you get phony “profits.”
First and foremost in the green shoot department is the manipulated bear market rally. Both the Dow and S&P 500 have been creeping up and holding on to gains. When reality threatened the ticker, little manipulated rallies and after hours futures buys were staged to herd the traders back to the buy side. Accounting rules governing how banks can value the billions in bad securities they hold, both on and off their balance sheets, were simply suspended. Mark to market became mark to whatever I damn well please, thank you very much. This allowed insolvent institutions deemed “too big to fail” to pretend that they were earning profits instead of sustaining losses. It was simple delusion and collective self-denial by means of statistical manipulation.
As in Orwell’s 1984, the headlines that were spawned from this numerical hanky panky were all rosy, a contrived official “truth” that was editable from moment to moment as the direction of the stock ticker required. It was meant to foment the trumped up stock rallies we seen sucking in the last of the sucker money out there in investor land. Restrictions were also placed on when and how you could short endangered corporate stocks, putting brakes on any downward movement in the ticker.
Earlier, as the crisis unfolded months ago, the “flight to safety saw billions flow into government treasury certificates. Yet as government deficits and total debt continued to pile up there was an implicit understanding by the real money out there that this debt was truly unsustainable—perhaps even unserviceable. Geithner asked Congress to raise the debt ceiling, already at $12.1 trillion, an amount that is nearly the equivalent of our entire annual GDP. “It is critically important that Congress act before the limit is reached so that citizens and investors here and around the world can remain confident that the United States will always meet its obligations.”
Consider what he was really saying. Please let us go even deeper into unsustainable debt, because we cannot balance our budget or meet our obligations now without more massive borrowing—nor can we do either after more massive borrowing. All we will end up with is more and more debt. No wonder he was practically laughed off the stage by Chinese university students when he tried to assert that China’s investments in the US were safe. Yes, as safe as a “security,” one of the great misnomers of the last few decades.
Suddenly T-bill auctions saw fewer and fewer buyers. The Chinese started grumbling and cutting back. The Japanese tried to smuggle billions in bond certificates into a Swiss bank. Money came back to the stock market, led by Goldman Sachs’ clever little front running trading algorithms until a disgruntled employee absconded with the code. Goldman had been in the #1 spot for daily trading volume for years. Suddenly they did not even make the top 15. But not to worry, the NASDAQ decided to simply stop reporting this data to cover the gaff, which shows you where the real power is in this country. When statistics ever reveal anything that might uncover some truth about the way our world actually works, again, as in Orwell’s world, they are simply “discontinued.”
Elizabeth Warren of the Business Insider chimed in with this assessment: “The banks are still insolvent. That little tweak to mark-to-market accounting a couple of months ago has allowed us all to plunge into deep denial. Now that the banks are allowed to lie about what their toxic assets are worth, they'll never sell them (because if they did they would have to write them down). The smaller banks are undercapitalized and will have to raise another $12-$14 billion.”
So this is the sort of duplicity and conniving that has propped up the banks and stock markets. If that were not bad enough, the fact that these markets are completely disconnected from the reality on Main Street makes any perception of recovery that is based on the market ticker nothing more than ignorance. You ignore the record foreclosures rate set in July, ignore the continuing plunge in home values, $10 trillion in evaporating equity, ignore the failing businesses, falling retail sales, lost jobs, even as the government itself ignores the 5 million workers who are deemed “discouraged” and who simply gave up on trying to find a job.
Instead of truthfully reporting them as unemployed, the statisticians simply exclude them from the work force, shrinking the pool of workers so the percentages they report will look like a recovery is nigh at hand. This is wishful thinking at best, downright lies if we look at this with any intellectual honesty.
Here’s some of the fallacious number manipulation that has produced contrived “good news” to spin the green shoots and recovery meme on the news. Consider unemployment, as I commented in “Lies, Damn Lies, and Statistics:”
1) Have you been out of a job for longer than one year?
2) Have you recently seen your unemployment benefits run out, but still find no work?
3) Are you out of work but so discouraged you haven't looked for a job in the last 4 weeks?
4) Have you lost your full time job and are you working part time to scrape by?
5) Are you in a trade or profession that has seasonal or chronic unemployment?
GOOD NEWS FROM THE GOVERNMENT!!! You're NOT unemployed!
Yes, you read that correctly. If any of the above conditions applies to you, according to the government you are NOT unemployed! Forget about the fact that you also do NOT receive a paycheck each week. That's a minor detail to the statisticians who compile the rosy employment data at the Bureau of Labor Statistics. When Uncle Sam counts heads for all folks he reports as unemployed in the official U-3 number, none of the categories above are tallied.
Let's sharpen a pencil and add things up...
1) About 5,000,000 have been out of work over a year--but they are no longer counted.
2) About 71,500,000 saw their benefits run out in the last 60 days--out of work, but not counted.
3) About 1,400,000 didn't look for a job in the last month--out of work, but not counted.
4) About 9,000,000 can't find a full time job at all--not counted as unemployed.
5) Tens of thousands of seasonal workers have no current work--but they are not counted.
Add to this the fact that tens of thousands of former small business owners, who could not claim unemployment insurance when their business failed, are also not counted. And all those workers at state offices closed to save money, and all those workers sent home without pay for a week in companies all across the nation... not even in the Fed spreadsheet. Not counted. Then consider that the government just did a "statistical sample" and added 185,000 new people to be counted as "employed" last month, even though no data exists to prove any of these people were real, or that they actually landed a job. It was just a math formula.
Don't you just love the way the government crunches numbers? This is the same sort of basic intellectual denial that sees all sorts of "green shoots" sprouting up when in fact there is no sign of any economic recovery underway now at all. Zero, zilch, none. So after heavily fudging its numbers the Federal government reports only 9.5% unemployed (BLS Number for June '09) when in actuality the real number is about double that. Then by discounting all the distressed workers listed above the Government shrinks the work force and says the jobless rate lowered to 9.4% in July, even though another quarter million jobs were lost that month. The government numbers are flat out wrong, and any “economist” that relies on them is being foolish.
In reality one in five American workers are out of work, or underemployed, about 20% of the workforce now. Spin that any way you want, but it is near depression level unemployment, and it arrived 24 months sooner than it did in the 1930s.
Charles Hugh Smith took his sharp pen to the current stock market rally and noted ten reasons why the so called imminent recovery is a house built on quicksand.
1. Structural unemployment (real unemployment) is skyrocketing.
2. The jobless rate declined because the work force shrank.
3. Everyone seems to have forgotten we need to create 250,000 jobs a month just to stay even with population growth.
4. The interest on all the debt the nation is taking on to bail out bankers and "stimulate" the dead credit-bubble model will place a drag on growth far into the future.
5. Interest rates are set to double.
6. Tax revenues are tanking.
7. Normal accounting and reporting rules have been suspended.
8. Commercial Real Estate is spiraling round the drain.
9. Consumers are retrenching generationally, not for a few months.
10. Residential housing is not healed; it's still bleeding profusely.
So, you can believe MSNBC’s talk of an ever rising DOW leading us all up the yellow brick road to recovery, or you can understand that manipulated stock plays and fabricated statistics do not reflect in any way the real condition of the economy. Take your pick.
Real Pain
Let’s take real estate for a moment, where the crisis first emerged. Everyone has been looking at housing starts, new home sales, and seeing a tiny uptick that they quickly spin into recovery. What they omit from the analysis is that new home sales make up only a third of the market, which is largely dominated by existing home sales. And of these what they also omit from their dullard minds is the enormous numbers of foreclosures and bank auctioned short sales that now makes up the existing home sale number.
In effect, that number is a measure of pain, not recovery. People are losing their homes and banks are dumping them for whatever they can get. People are selling their homes for big losses, and moving on. We aren’t looking at typical healthy mortgages in any sense of what used to be defined as a normal market. The lion’s share of all housing sales is now just a measure of pain.
On the commercial side, a huge wave of potential defaults now threatens—so much so that it even got the attention of Ben Bernanke. According to Bloomberg, Bernanke admitted that:
"A potential wave of defaults in commercial real estate may present a 'difficult' challenge for the economy."
Note to Ben, it's not a 'potential' wave, it's a 100 foot monster cresting just off shore and ready to roll in on the banking and financial system with a vengeance.
Elizabeth MacDonald of Emacs Stock Watch put it all in honest numbers: “About $1.4 trillion of commercial real estate mortgage loans will be maturing within the next five years, and as much as $750 billion will be maturing in less than three years, says Steven Sandler, chief executive officer of the private equity firm Crosswind Capital in Rye, NY. An estimated $165 billion to $204 billion in U.S. commercial real estate loans could be maturing this year alone, analysts estimate. All of these loans will likely need to be refinanced in an already jammed-tight lending market.” Again the Fed is desperately trying to build a levee before the wave hits. It has announced it will accept commercial mortgage-backed securities (CMBS) as collateral for Fed loans through TALF, a program to stimulate the purchase of securities on these loans where the government (taxpayer) puts up the lion’s share of the money and takes the lion’s share of the risk—while the “investor” gets free money and virtually no risk. As if they have learned nothing, the intent is to get the old securities game restarted at all costs, and the cost this time could be enormous.
MacDonald reported that Standard & Poors had downgraded a raft of bonds based on these commercial mortgages from AAA to near junk, (perhaps in an effort to correct their ratings fraud and return to reality). But, oops, a few weeks later, with the Fed ramping up TALF, the bonds were quietly restored to their AAA rating so they could qualify for that program. Sounds like someone paid a visit to S&P and did a little arm twisting. Someone tries to reflect reality and calls a proverbial spade a spade—someone else steps in and restores the illusion. The game must go on, but I predict that TALF will be unable to stave off the wave of commercial defaults beginning to surge ashore.
The first wave, sub-prime housing loan defaults, was only the initial storm surge before the hurricane of real estate distress out there. Yet it was able to knock down Bear Stearns and Merrill Lynch, run Morgan Stanley to high ground, flood out WaMu and Wachovia, all but topple AIG, and inundate Fannie Mae and Freddi Mac under twenty feet of malarial toxic waste water. If that wasn't bad enough, it so stressed the housing market that millions of "homeowners" saw their house values decline to a point where they were also "underwater," unable to sell without taking a loss.
Financial Times reported this month: "Two of America’s biggest banks, Morgan Stanley and Wells Fargo, on Wednesday threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loans...Wells Fargo saw non-performing loans in commercial real estate jump 69 per cent, from $4.5bn to $7.6bn in the second quarter as the economic downturn caused developers and office owners to fall behind in their mortgage payments." Bernanke noted that the market for commercial mortgage backed securities had “completely shut down,” meaning banks have no way to pass the risk of default off to some other dupe in the system. This means that as all the commercial loans mature and need refinancing, the bankers won't be so friendly. It also means that we will see more and more commercial defaults, more empty office towers, strip malls, and vacant apartment complexes. It's the worse possible time to be a commercial real estate developer/investor.
All of this, the sub-prime, ALT-A, Option ARM and interest only loans, the no-doc, low-doc, liar loans that were written and approved, all of it was the creation and cash cow of the banking system. The crisis we have now with all these loan resets triggering defaults and bank foreclosures is entirely "Made in America" by the US banks. The notion of modifying the loans so payments get lower as the house sheds value never seems to occur to the banks. They can't imagine any solution that doesn't fatten their bottom line.
James Kunstler commented: "A broad consensus has formed in the news media and among government mouthpieces and even some "bearish" investors on the street that "the worst is behind us" in this tortured economy. This view is completely crazy." In a subsequent post he went on to characterize the happy glow that we have created with this “fog of numbers.” … “Now that Newsweek Magazine -- along with the mendacious cretins at CNBC -- have declared the "recession" officially over, it's a sure thing that we are entering the zone of greatest danger. Some foul odor rides the late summer wind, as of a rough beast slouching toward the US Treasury. The stock markets have gathered in the critical mass of suckers needed to flush all remaining hope out of the system. The foreign holders of US promissory notes are sharpening their long knives in the humid darkness. The suburban householders are watching sharks swim in their driveways. The REIT executives are getting ready to gargle with Gillette blue blades. The Goldman Sachs bonus babies are trying to imagine the good life in Paraguay or the archipelago of Tristan da Cunha.”
Of course not everyone believes the media assertion that a recovery is nigh at hand. The Washington Times reported on what some of the “real money” believes out there. “Two major entrepreneurial tycoons, in the multibillion-dollar league, with worldwide interests, speaking not for attribution, agree that the worst is yet to come. America has to reinvent itself for the 21st century, but this won't happen before another big credit-rattling shock. Millions of jobs are not coming back, they said. They were speaking about the current global financial and economic crisis. Another humongous credit crunch is on the way, they believe, and the current optimism is simply a pause before another major downward slide. Unemployment, they forecast, will climb from the low to the high teens. A pledge to limit tax increases to those making more than $250,000 a year is a pipe dream. Someone has to pay the health piper. Major social dislocations are on their horizon for 2010. One of the interlocutors has shunned all manner of stocks in favor of discounted corporate bonds that yield 7 1/2 percent, and gold. The other has already moved all his financial holdings into a cocktail of Asian currencies based at a new entity he created in Singapore.” There you have it. The men with the real bucks at risk have little or no faith in the “recovery.” They are buying gold and interest in a basket of Asian currencies.
What is it that keeps the broad consensus so enamored of these ephemeral green shoots? Perhaps we so long to return to the good old days of shopping on credit, that we will believe any good news whispered our way by the media. Yet reality tests every opinion in time. We are still in the denial stage of our grief over the diminishing prospects for our collective future. The anger is yet to come, and it will be very uncomfortable politically when it finally does come--when people realize things haven't really changed at all, in spite of what MSNBC, CNN and Fox News think.
Why There Is No Recovery In Sight
For any real recovery we will need three things:
1) a healthy consumer base with disposable income,
2) a healthy business sector that is producing, not losing, jobs,
3) a healthy real estate sector that is appreciating in value and creating equity, not depreciating and losing equity as it is now.
Can anyone in their right mind assert that we’re about to see a surge in consumer spending, job creation, and real estate? Of course not. All they can assert is that the decline in those areas has slowed from its freefall, which is only to be expected in any downturn. The crisis still has many evolutions to work through, the greatest of which is the massive debt at every level of our society, from federal and state governments, to cities, the banks, corporations, households and individuals. Debt is the reason we are in this crisis, and it will not end until this debt is either paid off or defaulted. Sadly, the solutions taken so far have all been based on accumulating more and more debt.
Consumers have finally “felt the pinch” the banks have put on them for years. The game of ever expanding credit is over. 8 million credit cards were terminated in the last year, and millions more in credit lines were cancelled. Consumers have started saving, and for the first time in history, consumer credit contracted year over year.
Mike Whitney summed this situation up nicely: “When credit contracts in a consumer-driven economy, bad things happen. Business investment drops, unemployment soars, earnings plunge, and GDP shrinks. The Fed has spent more than a trillion dollars trying to get consumers to start borrowing again, but without success. The country's credit engines are grinding to a halt.” This situation of massive consumer debt in contraction, along with continued job loss, tells any thinking person that there will not be a resurgence in consumer spending—and if one comes it will be as short lived as the actual funds saved thus far in the crisis. Then it will be back to the reality of cash and carry. As Charles Hugh Smith asserts, this could also be a generational shift in consumer spending patterns. So say good-bye to nothing down and low, easy payments—and all the retail sales that mantra drove in days of yore. Notice how bank financing and credit falls as unemployment rises. Recovery?
I’ve said enough on #2, the shrinking job market. It is likely to remain soft for many years, perhaps a decade according to some observers. Slow sales do not auger for lots of new hiring, and most of the healthy job sectors like health care and education are now saturated. They cannot be counted on to continue producing new jobs. So continuing job loss and long term unemployment will mean shrinking incomes and simply reinforce the dire situation we already have with the failing consumer. Also, the millions falling off the unemployment benefit rolls into the limbo of the invisible unemployed will remain missing in action in the shopping malls. Instead they will begin to populate the streets and alleys of former middle class neighborhoods—a new class of pan handlers, tent campers and homeless people, with the smudge of the depression staining their white collars, and no prospects for a job that might restore their former white collar middle class life style.
As for #3, housing, the 90 day delinquency rate was well under 1% in January of 2007. It is now approaching 7%, and has increased every month since. Foreclosure rates now continue to climb after the brief moratoriums imposed by government have expired. Short sales have driven the existing home sale market. In short—no recovery in sight and a nightmare in commercial real estate ready to open the second act of this play.
The Next Crisis
Everyone is wondering what the finale will be—and when we can expect it. I recently wrote about all the terrible things forecasted by the blogosphere that are just about to happen but never seem to get here—like the asteroid or earthquake that is always threatening. I think this is just a trick of our own wishful thinking. The damage already done has effectively destroyed the banking system. It is a mirage. It is not functioning as it should, and is only operating at all because the banks and government have colluded and agreed that all the normal rules of accounting for losses and holding reserves will be set aside so we can pretend the system is still solvent. It was an expedient “gentlemen’s agreement” that has created the illusion that the worst has been averted—when in fact the damage is already done.
We just refuse to admit what has happened. This is like a person looking at the ruin of their hurricane devastated home and claiming that everything is still really there, just in a different arrangement. So banks claiming that they will hold all their toxic assets to maturity when they will miraculously be worth what they were on the date of issuance is a bit like that same former homeowner claiming all they have to do is rearrange the shattered fragments of their home to restore it to its former condition. The problem is that most of the house has been blown into the next county, and the same can be said for the solvency of banks holding countless trillions in mortgage backed securities and derivatives.
Unfortunately, this recession is far from over. In fact it is about to transition definitively from “Great Recession” to “Great Depression” as the people living on Main Street realize that their lives are going from bad to worse, in spite of TARP and TALF and all the other bailouts. Good news! Bankrupt Chrysler is going to roll out the new Volt electric car claiming 230 miles per gallon. Bad news—it will cost $40,000, and only the wealthy will be able to buy it. No one else will get financing. This is the sad state of diminishing returns for Average Joe.
The rising commercial real estate defaults cannot be dismissed by “spin” on the news. The losses will dwarf those caused by the sub-prime crisis and residential markets. In the short run, deflation will strengthen the dollar, but also add to the crushing weight of dollar denominated debt. US treasuries, already being shunned, will face a moment of truth in the not too distant future. Watch this bond market. When it falters and fails Bernanke has no other choice but to try and monetize the massive US debt load . This will spell the end of the dollar, already an anemic shadow of itself since “The Fed” came into existence with a pledge to maintain its value and stability.
Coming soon to a neighborhood near you: bank holidays, where you will face limits on daily cash withdrawals, a dollar collapse, a re-reckoning of international currency exchanges, and the kicker—price inflation the likes of which we have never seen. At the moment the massive deflation that is crushing the economy is the prevailing danger. Its opposite brother, inflation, will visit us later, perhaps years from now.
Throughout this desperate period businesses will continue to fail as the bailout money runs out. Watch how car sales fade away again to near nothing after the cash runs out for clunkers. We have borrowed from a future we never thought we would have to face. The future is nigh at hand, however, and we will face it sooner than we think.
